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Thursday, January 29, 2015

FHA Eliminates Post-Payment Interest Charges

QUESTION
Is it true that FHA modified the manner in which interest is to be calculated when a FHA loan is paid in full by a borrower, allowing mortgagees to charge interest only through the date a mortgage is paid and not beyond that?

ANSWER  
Yes. The new rule, called “Handling Prepayments: Eliminating Post-Payment Interest Charges”, applies for FHA-insured mortgages closed on or after January 21, 2015. For FHA loans that close on or after January 21, 2015 mortgagees may only charge interest through the date the mortgage is paid off; that is, mortgagees will be prohibited from charging interest beyond the date the mortgage is paid in full. Previously, FHA charged interest for the entire month at the beginning of the month. Therefore, if a borrower paid off their FHA mortgage at the beginning of the month they still paid interest for the entire month. 

Additionally, for all FHA mortgages that close on or after January 21, 2015 a borrower will not be subject to a prepayment penalty at any time or in any amount. The rule explicitly prohibits lenders from charging borrowers post settlement interest, which the Consumer Financial Protection Bureau broadly defines as a "prepayment penalty" for all FHA single-family mortgage products and programs. 

Monthly interest on the mortgage will be calculated on the actual unpaid principal balance of the loan as of the date the prepayment is received, and not as of the due date for the next mortgage payment.

Again, please note that these changes will only be effective for FHA loans that close on or after January 21, 2015. 

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group